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Battle for Deposits at China Banks Raises Fears

By Lingling Wei, Dinny McMahon

BEIJING—To boost their deposit levels ahead of an expected year-end regulatory review, Chinese banks have recently accelerated their sales of high-yield investment products to customers, raising new concerns about the financial system and spurring the government to step up its oversight of the products.

Since late last month, banks of all sizes have increased their competition to attract deposits from middle-class savers by offering so-called wealth-management products. These WMPs, typically investment vehicles maturing in one year or less, pay much higher interest rates than regular bank deposits. Executives at some Chinese banks say they are now launching new WMPs daily, much more frequently than prior to the recent push.

Chinese bankers say there were similar races in the past, ahead of scheduled regulatory reviews of their loan-to-deposit ratios, but this year the competition is fiercer because banks are facing tighter funding conditions. Both bank lending and the broadest measure of money supply, M2, came in below analysts’ expectations for November, data released Tuesday show, adding to concerns about a liquidity crunch as the year draws to a close.

The rapidly growing WMP market is causing concern among regulators. WMPs are pools of stocks, bonds, currencies or loans, repackaged by banks and marketed to their customers, much as mortgages were repackaged into securities for investors in the U.S. before the financial crisis.

Fitch Ratings estimates that as much as half of the deposit growth in China is now generated through WMPs. It forecasts that by the end of the year the outstanding balance of such products will reach 13 trillion yuan, or about $2 trillion—roughly 14.5% of total deposits in the country.

On Tuesday, the China Banking Association, an industry group backed by the China Banking Regulatory Commission, formed a committee to step up oversight of the WMP business. According to a statement posted on the Chinese government’s website, CBRC official Du Jinfu said the committee will play a role in regulating the business and ensuring its “healthy development.”

This latest WMP push, banking executives and analysts say, was driven by an expected year-end regulatory review of banks’ loan-to-deposit ratio, a measure of liquidity.

“Banks want to make sure that they have enough deposits at hand to meet regulatory requirements, and the most common practice to compete for deposits is through selling WMPs,” said Zhu Chaoping, head of research at ChinaScope Financial, a research and data firm partly owned by Moody’s Corp. Funds put into WMPs don’t count as bank deposits immediately. But at maturity they are moved into traditional savings accounts, beefing up the deposit base. Many of these products are timed to mature when banks need higher deposit levels, such as at the end of each quarter.

“It’s extremely difficult for banks to attract deposits,” said Li Jian, an executive at China Everbright Bank Co. A bank not offering “good WMPs,” he said, would risk losing depositors to banks that are.

Chinese banks currently offer an annualized interest rate of between 4% and 6% on WMPs that mature in one to six months. On traditional deposits, the rates they can offer are limited by a central-bank benchmark—which right now means they top out at 2.86% on three-month deposits and 3.08% on six-month deposits.

The main concern among regulators is banks’ ability to make good on the principal and interest owed to investors in WMPs, whose risks are often poorly disclosed to investors. Some of the money going into these products has been used to make high-interest loans to risky private businesses shunned by the banks themselves, a phenomenon critics say could exaggerate loan and investment losses in China’s financial system if an economic slowdown led to widespread defaults.

Such fears have been exacerbated by the recent collapse of a 140 million yuan WMP offered through a Shanghai branch of Huaxia Bank Co., which ranks 13th among China’s commercial banks by assets. Proceeds were invested by a third-party private-equity firm in four businesses in the inland province of Henan, including a pawn shop.

Investors were promised returns of between 11% and 13%, but when the one-year product matured late last month, they weren’t paid back—triggering days of protests by dozens of investors and an intervention by Shanghai authorities. The bank is now negotiating with investors to try to reach a “reasonable solution,” said people with direct knowledge of the matter.

Having to share or repay investors’ losses for WMPs “would be very negative for banks, as it means banks would face potential contingent liabilities for all off-balance-sheet products,” said analyst May Yan at Barclays Capital.

The potential risk for banks is that they usually invest the proceeds from the sale of the WMPs in loans or securities with longer maturities than the products themselves. In normal times, when products mature, banks either persuade customers to roll over their investments into new WMPs, or banks pay out using funds raised from the sale of new products. But that strategy could backfire if demand for new products drops and banks don’t have enough money to pay holders of maturing products.

Among the array of WMPs sold by Chinese banks recently is a three-month product issued by China Citic Bank Corp., the country’s seventh-largest lender by assets. On a minimum investment of 200,000 yuan ($32,000), it advertised an annualized return of 4.8%—and sold out within hours of being issued Monday, according to Citic representatives.

A prospectus includes standard risk disclosures and a general explanation of the types of investments in which proceeds from the product will be placed, including bonds and loans. But it doesn’t specify what projects or companies the funds will be used for.

One of the investors who bought is Zhong Tao, a 62-year-old retiree who said that after years of having savings accounts she withdrew all her money and now rolls it out of one WMP and into another.

“With deposit rates so low and inflation so high,” Ms. Zhong said, “I would be stupid not to do this.”